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What Landlords Should Know About Getting Proof of Income (Even for Self-Employed Applicants)

proof of income

There is a lot to enjoy about being a landlord, with perks such as extra income, tax deductions, and being your own boss. It’s also one of the few careers where it’s OK to ask how much money someone makes. It’s a prerequisite, in fact.

Verifying income information is one of the many jobs of a landlord, although not usually one of the top five favorites. It can be tedious and cumbersome, but it’s necessary to ensure the applicants can pay the rent each month and avoid the time-consuming and expensive eviction process.

Pay stubs are the easiest and most reliable way to verify an applicant’s income, but they aren’t always options. Many people work as independent contractors or freelancers and don’t have pay stubs to prove their income.  This guide will explain proof of income, how a landlord can verify it, and ways to spot a fake.

Proof of Income, Explained

Several documents can serve as proof of income by detailing where, when, and how an applicant makes their money. The most common type is a paycheck stub, but there are numerous others. 

It’s a general practice to require more than one document to ensure validity. A potential tenant should make roughly three times their rent as a general rule of thumb. Proof of income can come in many forms, including:

  • Pay stubs
  • W2
  • Bank statements
  • 1099 Form
  • Profit and Loss Statement (Schedule C)
  • Social Security benefits statement
  • Letter from an employer
  • Tax returns
  • Court-ordered agreement

Many landlords consider bonuses, holiday pay, overtime pay, and seasonal pay when verifying income for a potential tenant, but it isn’t always advisable. They should only consider base income, and they should only include inconsistent earnings such as overtime when the applicant is on the cusp of qualification.

Documents to Check for Income Verification

The methods a landlord uses to verify income depend upon their needs and preferences. Some may find it fits their management style best to manually check each document, while others may find a tenant screening service more applicable.

Manually checking proof of income requires calling banks, previous landlords, employers, and government agencies to personally verify each claim, as well as assessing each document for validity. Tenant screening services take care of all the legwork and provide the landlord with the required information.

Some landlords combine techniques, putting in their own efforts along with a screening service. Here’s what you need to know about these common types of proof of income:

W-2 Tax Form

A W-2 tax form provides information about the applicant’s income from the previous year. It’s a good indicator of what the person could accomplish financially – last year. Many people change jobs every year or a few times a year, so using a W-2 alone won’t give a landlord a complete picture of the applicant’s current financial status.
w2 form
Many people who use a W-2 as proof of income are freelancers, gig or contract workers, or entrepreneurs who may have enough income to rent but don’t have pay stubs from an employer to prove it. A W-2 form used in conjunction with other tax documents, such as 1099s and tax returns, can better depict a person’s financial capabilities.

1099 Tax Forms

Income from a source other than employment, such as interest, dividends, and government payments, are reported with a 1099 form. This IRS form shows landlords how and when an applicant receives income.

Tax Returns

A tax return is a form for taxpayers to list their annual income and personal circumstances. The IRS uses this form to assess the taxpayer’s liability for taxation. Some people receive money back from the government at the end of a tax year, but others owe money.

Bank Statements

Bank statements are typically released once a month and contain a summary of a person’s financial transactions during the previous month. Landlords can see how potential tenants use their money by gauging the deposits, withdrawals, and other listed transactions.

Income Statements

Income statements serve the same purpose as pay stubs, except they aren’t from an employer. Income statements are from wherever the person is receiving their income, such as:
  • Workers Compensation
  • Unemployment
  • Social Security
  • Disability
  • Trust funds
An income statement can effectively verify a steady income from anywhere a potential tenant receives it.

Landlords must verify every document for authenticity to ensure the tenant is suitable for the property. Tenant screening services verify these types of documents for landlords and property managers. 

Landlords who have only one rental property might choose to do the work themselves. One of the biggest concerns of manual verification, though, is spotting fakes.

How to Spot Fraudulent Documents

Potential tenants who don’t have what it takes to obtain a rental might submit forged and fraudulent documents to qualify for a lease. Verifying a tenant’s income is also an efficient way to weed out counterfeit documents and unscrupulous tenants before it’s too late. Here are a few tips to help spot the fakes.

1. Require a Form 4506

Require all applicants to sign a Form 4506 along with their application to streamline the process. Form 4506 is a request for a transcript of someone’s federal income tax documents from the IRS. Official transcripts are received directly from the IRS and have an official seal, making them difficult to replicate fraudulently.

2. Research the Applicant’s Business

Do your research. Find the business name on their application and search online for the company or business that the applicant claims to be affiliated with. There’s a good chance the income documents are fake if there’s no registered business.

3. Calculate Ongoing Balances

Proof of income documents such as bank statements and pay stubs have an ongoing total. Spot a fake by calculating the total deposits and payments. Fake documents typically have incorrect ongoing balances and totaled sums.

Counterfeit documents are not difficult to spot in most instances. The trick is to stay vigilant and remember to double-check every document.

Rent Safe Can Help Make Tenant Screening Easy

Don’t let the tedious parts of landlord life get you down. Ready to eliminate the risk of low-quality tenants? Want to protect your properties and your bottom line? 

Then you need to check out Rent Safe. Our digital platform helps renters easy-submit their applications for rentals, and landlords can streamline the steps it takes to screen potential tenants.

Rent Safe lets you easily create a tenant application and screening process. Your applicants can add co-signers, share references, upload documents, and more, and the customized dashboard provides convenient access to all the information you need. To learn more, contact us today. 

Frequently Asked Questions

Proof of income includes documents like pay stubs, W2 forms, bank statements, 1099 forms, profit and loss statements, social security benefits statements, letters from employers, tax returns, and court-ordered agreements.

For self-employed individuals, creating a profit and loss statement, along with bank statements, tax returns, and 1099 forms, can serve as proof of income.

Verification can be done through manual checks with banks, employers, and using tenant screening services, as well as by examining documents for authenticity and requiring Form 4506 for IRS transcripts.

Pay stubs are generally the best for employed individuals, while a combination of tax returns, bank statements, and profit and loss statements is ideal for self-employed applicants.

A potential tenant should earn roughly three times their rent to ensure they can comfortably afford the rental alongside other expenses.

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